Tredegar Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unless stated otherwise, figures are in millions of dollars. Tredegar operates Aluminum Extrusions, PE Films and Flexible Packaging Films.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales | $178.2 | $274.4 | $369.3 | $510.9 |
| Gross margin | 9.9% | 16.5% | 11.7% | 17.7% |
| Net income (loss) | $(18.9) | $14.9 | $(19.9) | $31.3 |
| Diluted EPS | $(0.56) | $0.44 | $(0.59) | $0.93 |
- Q2 pre-tax loss was $22.3 million and included a $15.4 million non-cash partial goodwill impairment ($11.9 million after tax) for Surface Protection. Six-month pre-tax loss was $22.9 million.
- Q2 EBITDA from ongoing operations by segment: Aluminum Extrusions $10.2 million (prior year $21.9 million); PE Films $0.8 million ($7.1 million); Flexible Packaging Films $0.2 million ($7.6 million).
- Six-month operating cash flow was $22.7 million, versus cash used of $9.4 million in 2022. Investing activities used $15.6 million, including $15.9 million of capital expenditures; financing activities used $4.9 million. Cash ended the period at $21.2 million.
- At June 30, debt was $141.0 million, up from $137.0 million at year-end; debt net of cash was $119.8 million. Shareholders’ equity was $183.1 million. The company reported $33 million of available credit under the then-current facility based on covenant restrictions.
Changes and management commentary
- Sales fell 35% in Q2 and 28% for the first half. Management attributed the decline across segments to lower volumes, customer inventory corrections and market weakness; lower metal and resin costs also reduced pass-through sales.
- Q2 Aluminum Extrusions volume fell 27.5% year over year; PE Films volume fell 35.2%; Flexible Packaging Films volume fell 13.1%. Management cited persistent weakness in consumer electronics, inventory corrections, lower production volumes and margin pressure.
- Working capital improved: inventories declined $41.1 million from December 2022, contributing to operating cash generation. Management said further working-capital improvement was anticipated by year-end.
- Interest expense rose to $4.7 million in the first half from $2.0 million, reflecting higher average debt and interest rates. Average floating-rate debt cost 6.6% in the first half versus 2.1% in 2022.
Outlook, financing actions and risks
- Management projected 2023 capital expenditures of $19 million for Aluminum Extrusions, $3 million for PE Films and $6 million for Flexible Packaging Films. The Aluminum Extrusions ERP/MES implementation was extended, with the earliest expected go-live in 2025.
- On August 3, 2023, the company adopted a plan to close the Richmond PE Films technical center by year-end and reduce semiconductor-film development and sales efforts. It expects $1.8 million in cash exit costs, up to $4.5 million in non-cash charges, and $3.4 million in annual cash savings beginning in Q4 2023.
- After quarter-end, the company suspended its regular quarterly dividend, which had an annual cash outlay of about $17.7 million, and amended its credit agreement. The amendment raises leverage covenant limits temporarily, lowers the facility’s maximum borrowing availability from $375 million to $200 million, increases borrowing spreads by 25 basis points starting Q3, and prohibits dividends and share repurchases through Q4 2024.
- At June 30, the company was compliant with its debt covenants, but Credit EBITDA and the net leverage ratio had deteriorated to $43.5 million and 2.76x from $84.4 million and 1.39x at year-end. Management projected further leverage deterioration, and was exploring alternative financing. The company said current resources should meet near-term requirements, while longer-term liquidity depends on operating results and other factors.
- The frozen pension plan settlement was expected around October 31, 2023; estimated underfunding was approximately $30 million at June 30. Settlement costs were estimated at $4–$5 million, and final funding needs could change with market conditions.
- Management identified continuing risks from weak demand and possible additional Surface Protection goodwill impairment, customer concentration, competition and imports, raw-material and energy prices, currency movements, and debt covenant compliance.
- Material weaknesses in internal control over financial reporting remained unremediated. Management concluded disclosure controls were ineffective at June 30; remediation continued, with certain controls at one manufacturing location scheduled for implementation in Q3 2023.
Key facts for investors to verify
- Whether demand, volumes and segment profitability recover, particularly in Surface Protection and Aluminum Extrusions.
- Compliance with amended credit covenants, borrowing availability and the need for replacement or additional financing.
- The impact of the dividend suspension and whether the planned facility reduction delivers expected savings and costs.
- Whether Surface Protection requires further goodwill impairment and whether internal-control remediation is completed and tested effectively.
- The final pension settlement amount, timing and related cash requirements.